Questcor Pharmaceuticals (
QCOR) produces and markets for all practical purposes a single product: H.P. Acthar Gel. Acthar is an injectable treatment for inflammatory disorders, particularly multiple sclerosis (MS) and infantile spasms (IS) in children. The company also markets Doral for insomnia, but Acthar contributes about 99% of all revenues, making an analysis of Questcor equivalent to an analysis of the outlook for sales of Acthar.
The drug, and its relationship with this company, have an interesting history. Acthar is not a new drug - it was first synthesized way back in the 1940's from pig pituitary glands. Eventually the drug was owned by Aventis, which nearly discontinued production in the mid-1990's due to poor sales. However, pediatricians objected, as there were few choices for treating IS, and Acthar was (and still is) the first option for treatment. Questcor acquired the rights to Acthar in 2001. With such low volumes and a low price, Acthar did not provide many benefits to Questcor. The company continued to be unprofitable.
In 2007, new management decided to change the direction of the company and focus solely on Acthar. Other pharmaceutical interests were divested. Management implemented a massive 14x increase in the price of Acthar, from $1,650 a vial to over $23,000 a vial in mid-2007. Immediately, Questcor's fortunes did a 180 degree turn. Revenues are up 900% since then. Operating margins today are a nearly unheard-of 60%. Free cash flow margins are right around the same levels. The balance sheet is squeaky clean, with $70 million in cash and no debt. Management is aggressively buying back shares. Simply put, right now Questcor is one of the most profitable companies MagicDiligence has ever analyzed... and results show no immediate signs of weakening.
The key question on Questcor is simple: how long can the company ride Acthar at current price levels? Surprisingly, the chances are pretty good. For one, the addressable market for conditions treated by Acthar is very small - only a few thousand prescriptions per year. Insurance companies have reimbursed the drug at nearly 90%, even with the massive price increase, although some have required stronger evidence of need. One reason for this is the low volume - most insurance companies may have to cover one or two cases a year, making the higher price statistically insignificant. A second is that it is one of the only treatments for IS, which can irreversibly affect a child's development if left untreated, making the drug virtually non-discretionary for these cases. The low volumes also make it less likely that a large competitor will target the market. Lastly, Questcor has filed to make Acthar an approved treatment for IS with the FDA (currently it is prescribed off-label).
